PensionsFirst tackles defined benefit conundrum

By LII editorial May 1, 2008

PensionsFirst tackles defined benefit conundrum

Claiming to offer a “groundbreaking new approach to managing longevity exposure and market volatility risks for defined benefit [DB] pension schemes”, PensionsFirst opened its doors for business in London in November. Chaired by Amelia Fawcett, former vice chairman and COO of US investment bank Morgan Stanley’s European operations, PensionsFirst’s approach rests on a range of analytical and investment products for which it has filed a patent application.

PensionsFirst explained that its proprietary risk management platform enables it to separately analyse each of the risks a DB scheme faces such as longevity, inflation and investment market risks, down to the individual member level, and remove those exposures it does not wish to manage, while retaining those with which it is comfortable and for which it wishes to retain the upside potential.

This, continued PensionsFirst, enables it to issue longevity bonds, tailored to each scheme’s individual liabilities. The impact of this solution for DB schemes, said PensionsFirst, will be:

· the availability of cost effective, scheme-specific investment solutions; and

· access to a new source of scaleable capital; and

· complete immunisation of all risks.

“Our entry into the market is set to revolutionise the way risk is managed in the global DB industry,” said Fawcett. “Our initiative introduces scaleable debt capital to the DB market for the first time, providing flexibility and cost efficiency to the management of DB risk.”

The most comprehensive of a number of investment products offered by PensionsFirst is its Blue Bond, which pays cash flows that match the liabilities of the scheme to its members. The bond, while “economically equivalent” to a DB scheme buyout, differs from insurance buyout solutions, as it is designed to be held as a scheme asset under the control of its existing trustees, said PensionsFirst.

Once a scheme has bought a Blue Bond and the scheme data and rules are on its administrative platform, PensionsFirst said, it is then very easy to price additional tranches related to benefits, accruals or increased compensation. PensionsFirst added that while the Blue Bond is primarily designed for use by ongoing schemes, if required it could also be structured to provide a full buyout solution for a closed scheme from which the sponsor wishes to be de-linked.

Fawcett stressed that PensionsFirst’s solution would have global appeal and that the company was in the process of establishing an international distribution network in conjunction with a series of major strategic partners.